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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995 Commission File No. 0-13295
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
CATERPILLAR FINANCIAL SERVICES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 37-1105865
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3322 West End Avenue
Nashville, Tennessee 37203-0983
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 386-5800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ] Not Applicable.
At December 31, 1995, there was (1) share of common stock of the
Registrant outstanding, which is owned by Caterpillar Inc.
The Registrant complies with the conditions set forth in General
Instruction (J)(1)(a) and (b) of Form 10-K and is therefore filing this Form
with the reduced disclosure format.
Documents Incorporated by Reference
1995 None
PART I.
Item 1. Business
General
Caterpillar Financial Services Corporation (the "Company") is a wholly
owned finance subsidiary of Caterpillar Inc. ("Caterpillar"). The Company and
its wholly owned subsidiaries in North America, Australia, and Europe are
principally engaged in the business of financing sales and leases of
Caterpillar products and non-competitive related equipment through Caterpillar
dealers and are also engaged in extending loans to Caterpillar customers and
dealers. Unless the context otherwise requires, the term "Company" includes
subsidiary companies.
The Company's business is largely dependent upon the ability of
Caterpillar dealers to generate sales and leasing activity, the willingness of
the customers and the dealers to enter into financing transactions with the
Company, and the availability of funds to the Company to finance such
transactions. Additionally, the Company's business is affected by changes in
market interest rates, which, in turn, are related to general economic
conditions, demand for credit, inflation, governmental policies, competition,
and other factors.
The Company's retail financing business is highly competitive. Financing
for users of Caterpillar products is available through a variety of
competitive sources, principally commercial banks and finance and leasing
companies. The Company emphasizes prompt and responsive service to meet
customer requirements and offers various financing plans designed to increase
the opportunity for sales of Caterpillar products and generate financing
income for the Company. In addition, the Company's competitive position is
improved by merchandising programs of Caterpillar, its subsidiaries, and/or
Caterpillar dealers.
The following types of retail financing plans are currently offered:
Installment sale contracts. The Company finances retail sales of
equipment under installment sale contracts with terms generally
from one to five years. Such contracts may be entered into (i) by
dealers with their customers and assigned to the Company, or (ii)
by the Company directly with equipment users.
Tax-oriented leases. Under these leases, the Company is
considered to be the owner of the equipment for tax purposes
during the term of the lease (generally from two to seven years,
except for special engine or turbine applications which may range
up to 20 years). For financial accounting purposes, these leases
are classified as either financing or operating leases depending
upon the specific characteristics of the lease. The Company
establishes a specific residual value on each product leased based
on various factors including the use and application, price,
product type, and lease term. Generally, the lessee, at the end
of the lease term, may continue to lease the product or purchase
the product for its fair market value. The profitability of these
leases is affected by the Company's ability to realize estimated
residual values upon selling or re-leasing the equipment at the
termination of the leases.
Non-tax (financing) leases. Under these leases, the lessee is
considered to be the owner of the equipment for tax and financial
accounting purposes during the term of the lease (generally from
one to six years). For financial accounting purposes, these leases
are classified as financing leases. The lessee customarily has a
fixed price purchase option exercisable upon expiration of the
lease term or will be required to purchase the equipment at the
end of the lease term.
Customer and dealer loans. The Company offers loans for working
capital and other business purposes to Caterpillar customers and
dealers meeting the Company's credit requirements. The loans may
be secured or unsecured and are for terms generally ranging from
two to ten years.
Governmental lease-purchase contracts. The Company finances sales
of products to cities, counties, states, and other qualified
governmental bodies for terms generally from two to seven years.
In general, this form of financing is subject to termination if
the governmental body does not appropriate funds for future
payments. The reduced interest rate in these transactions
reflects the fact that interest income is not subject to federal
income tax.
The Company also provides wholesale financing of Caterpillar dealer
inventory and rental fleets. The product being financed is fully insured
against physical damage. The amount of credit extended by the Company for
each machine is generally limited to the invoice price of the new equipment.
Maturities for inventory financing generally range from one to six months.
The stated maturity of rental fleet financings is generally 36 months,
however, the Company's experience has been that most terminate within six
months.
The percentages of the total value of the Company's portfolio represented
by these financing plans at December 31 of the past three years were as
follows:
1995 1994 1993
Retail Financing:
Non-tax (financing) leases 22% 20% 19%
Installment sale contracts 20% 23% 25%
Tax-oriented leases 20% 19% 20%
Customer loans 19% 18% 19%
Dealer loans 6% 6% 10%
Governmental lease-purchase
contracts 3% 3% 3%
Wholesale Financing 10% 11% 4%
The Company periodically offers below-market-rate financing to customers
which is subsidized by Caterpillar, its subsidiaries, and/or Caterpillar
dealers. In all such cases, the cost of such subsidies is borne totally by
Caterpillar, its subsidiaries, and/or the dealer (and not by the Company) and
is settled at the time each transaction is executed.
Tax-oriented leases and governmental lease-purchase contracts are
generally offered at fixed interest rates and fixed rental payments. Non-tax
(financing) leases, installment sale contracts, and customer and dealer loans
are offered at either fixed or floating interest rates. Approximately 80% of
the Company's portfolio involves financing with fixed interest rates. In
order to reduce the impact of interest rate and maturities mismatches on its
operations, the Company has a match funding policy of structuring the
maturities of a substantial percentage of its borrowed funds over periods
which closely correspond to the maturities of its portfolio.
The Company provides financing only when acceptable credit standards and
criteria are met. Decisions regarding credit applications are based upon the
customer's credit history and financial strength, the intended use of the
equipment being financed, and other considerations. In general, the Company
obtains a security interest in the equipment under retail financing.
Additionally, approximately seven percent of the total value of the Company's
portfolio (excluding loans to dealers) includes recourse to a dealer.
Management closely monitors past due accounts and regularly evaluates the
collectibility of receivable balances. The Company maintains an allowance for
credit losses which it believes is sufficient to cover uncollectible accounts.
Once it has been determined by management that a portion of the receivable is
not considered to be collectible, Company policy is to write off against such
allowance that portion of the outstanding receivable which is estimated to not
be recovered by leasing or selling the related equipment. Management believes
the allowance for credit losses at December 31, 1995 is sufficient to provide
for any losses which may be sustained on outstanding receivables. For more
information on receivables and the allowance for credit losses, see Note 2 of
the Notes to the Consolidated Financial Statements.
The following table summarizes the Company's delinquency experience
showing past-due receivables as a percentage of total receivables:
Delinquency Experience
December 31,
1995 1994 1993
Past due 31 to 60 days ..................... 0.6% 0.5% 0.7%
Past due over 60 days ..................... 1.4% 1.7% 1.2%
At December 31, 1995, the largest single customer/dealer account
represented 4.1% of the Company's portfolio and the five largest such
customer/dealer accounts represented 11.3% of the portfolio. With respect to
dealer financing, at December 31, 1995, the largest single dealer account
represented 4.1% of the Company's portfolio and the five largest such dealer
accounts collectively represented 10.9% of the portfolio. In the opinion of
the Company, the loss of the business represented by any one of these accounts
would not have a material adverse effect on the Company's overall business.
Relationship with Caterpillar
Caterpillar provides the Company with certain operational and financial
support which is integral to the conduct of the Company's business. The
employees of the Company are covered by various benefit plans, including
pension/post-retirement plans, administered by Caterpillar. The Company also
reimburses Caterpillar for certain corporate services. For more information
on payments for services, see Note 10 of the Notes to the Consolidated
Financial Statements.
The Company, in conjunction with Caterpillar and
its subsidiaries, periodically offers below-market-rate financing to customers
under merchandising programs. Caterpillar, at the outset of the transaction,
remits to the Company an amount equal to the present value of the interest
differential which is recognized as income over the term of the contracts.
For more information on the interest differential payments, see Note 10 of the
Notes to the Consolidated Financial Statements.
The Company has agreements with a subsidiary of Caterpillar to purchase,
at a discount, some or all of this subsidiary's receivables generated by sales
of products to Caterpillar dealers in Germany, Austria, and the Czech
Republic. These purchases (dealer floor planning) in 1995, 1994, and 1993
totaled $330.7 million, $190.9 million, and $210.2 million, respectively.
Through December 31, 1995, Caterpillar had invested a total of $325.0
million in the equity of the Company. The Company and Caterpillar also have
an agreement (the "Support Agreement") which provides, among other things,
that Caterpillar will (i) remain, directly or indirectly, the sole owner of
the Company, (ii) ensure that the Company will maintain a tangible net worth
of at least $20.0 million, (iii) permit the Company to use (and the Company is
required to use) the name "Caterpillar" in the conduct of its business, and
(iv) ensure that the Company maintains a ratio of earnings and interest
expense (as defined) to interest expense of not less than 1.15 to 1. The
Support Agreement provides that it may be modified, amended, or terminated by
either party. However, no such modification or amendment, which adversely
affects the holders of any debt outstanding at the execution thereof, is
binding on or in any manner becomes effective with respect to (i) any then
outstanding commercial paper, or (ii) any other debt then outstanding unless
such modification or amendment is approved in writing by the holders of 66-
2/3% of the aggregate principal amount of such other debt. The obligations of
Caterpillar under the Support Agreement are to the Company only and are not
directly enforceable by any creditor of the Company, nor do such obligations
constitute a guarantee by Caterpillar of the payment of any debt or obligation
of the Company.
To supplement external debt financing sources, the Company has variable
amount lending agreements with Caterpillar (including one of its
subsidiaries). Under these agreements, which may be amended from time to
time, the Company may borrow up to $537.3 million from Caterpillar, and
Caterpillar may borrow up to $237.3 million from the Company. All of the
variable amount lending agreements are effective for indefinite terms and may
be terminated by either party upon 30 days' notice. At December 31, 1995, the
Company had borrowings with Caterpillar totalling $475.5 million (see Note 6
of the Notes to The Consolidated Financial Statements), but had no loans
receivable under these agreements. At December 31, 1994 and 1993, the Company
had no outstanding borrowings or loans receivable under these agreements.
The Company has forward exchange contracts to hedge its U.S. dollar
denominated obligations in Australia against currency fluctuations. These
contracts have terms generally ranging up to three months. At December 31,
1995, 1994, and 1993, the Company had forward exchange contracts totaling
$96.6 million, $172.6 million, and $143.1 million, respectively, all with
Caterpillar.
The Company has a tax sharing agreement with Caterpillar in which
Caterpillar collects from or pays to the Company its allocated share of any
consolidated U.S. income tax liability or credit applicable to any period for
which the Company is included as a member of the consolidated group. A
similar agreement exists between Caterpillar Financial Australia Limited and
Caterpillar of Australia Ltd. with respect to taxes payable in Australia.
Item 2. Properties
The Company does not own any real estate. Its principal executive
offices are comprised of approximately 65,000 square feet of office space at
3322 West End Avenue, Nashville, Tennessee.
As of December 31, 1995, the Company had additional offices in or near
Phoenix, Arizona; Dallas, Texas; Atlanta, Georgia; Baltimore, Maryland;
Chicago, Illinois; Nashville, Tennessee; Melbourne, Australia; Calgary,
Alberta; Toronto, Ontario; Munich, Germany; Leipzig, Germany; Stockholm,
Sweden; Oslo, Norway; Copenhagen, Denmark; Paris, France; London, England;
Madrid, Spain; Lisbon, Portugal; and Mexico City, Mexico. For more
information on leases, see Note 11 of the Notes to the Consolidated Financial
Statements.
Item 3. Legal Proceedings
The Company is a party to various litigation matters and claims, and,
while the results of litigation and claims cannot be predicted with certainty,
management believes the final outcome of such matters and claims will not have
a material adverse effect on its consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
Information for this Item 4 is not required. See General Instruction
J.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is owned entirely by Caterpillar and is not
publicly traded. In its three most recent fiscal years, the Company has not
declared or paid cash dividends on its common stock.
Item 6. Selected Financial Data
Information on this Item 6 is not required. See General Instruction J.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The Company derives its earnings primarily from financing sales and
leases of Caterpillar products and from loans extended to Caterpillar
customers and dealers.
New retail financing during 1995 totaled $3,024.0 million, a 38% increase
over the $2,183.4 million financed in 1994 and a 58% increase over the 1993
new business of $1,916.9 million. These increases were the result of
financing a higher percentage of increased dealer deliveries of Caterpillar
products in the markets served by the Company. Wholesale financing activity
during 1995 was $2,054.4 million, a 150% increase over the $821.5 million
financed in 1994 and an 800% increase over the 1993 amount of $228.2 million.
The increase was due to expansion of the Caterpillar dealer rental fleet
financing program in North America.
Revenues from operations in the United States were more than 75% of total
revenues in 1995, 1994, and 1993. Net income from operations in the United
States was more than 89% of total net income in 1995, 1994, and 1993. For
more geographic segment information, see Note 12 of the Notes to the
Consolidated Financial Statements.
Past due percentages decreased slightly in 1995. The allowance for
credit losses will continue to be monitored to provide for an amount which, in
management's judgement, will be adequate to cover uncollectible receivables
after considering the value of any collateral.
For more information on the composition of the Company's portfolio by
financing plan, see "Item 1. Business."
1995 Compared With 1994
Total revenues for 1995 were $611.8 million, a 37% increase over 1994
revenues of $447.0 million. The increase in revenues resulted primarily from
the increase in financing volume (the portfolio value increased to $5,288.3
million at December 31, 1995 from $4,437.6 million at December 31, 1994) and
the increase in Other income described below.
The annualized interest rate on finance receivables (computed by dividing
annualized finance income by the average monthly finance receivable balances,
net of unearned income) was 9.2% for 1995 compared with 8.6% for 1994. Tax
benefits associated with governmental lease purchase contracts and a portion
of tax benefits associated with long-term tax-oriented leases are not
reflected in such annualized interest rates.
Other income of $52.9 million for 1995 included servicing and other
securitization-related income, fees, gains on sales of equipment returned from
lease, gains on sales of receivables, and other miscellaneous income. The
increase of $30.6 million for 1995 was primarily due to recording gains of
$10.9 million in the first half of 1995 on interest rate caps written by the
Company (versus losses in 1994 reflected in Other expense), an increase in
servicing and residual income earned on assets securitized by the Company of
$10.4 million, and an increase in gains on sales of receivables of $5.3
million (see Capital Resources and Liquidity Section).
Interest expense for 1995 was $298.4 million, $86.3 million higher than
1994 due to increased borrowings to support the larger portfolio and higher
borrowing rates, as the average cost of borrowed funds was 6.6% in 1995
compared with 6.2% in 1994.
Depreciation expense increased from $94.4 million in 1994 to $101.2
million in 1995 due to new operating lease business.
General, operating, and administrative expenses increased $14.7 million
over 1994 primarily due to staff-related and other expenses required to
service the larger managed portfolio. The Company's full-time employment
increased from 414 at the end of 1994 to 461 at December 31, 1995.
Provision for credit losses increased from $23.2 million in 1994 to $42.8
million in 1995. This increase reflected a higher provision taken by the
Company and an increase in new retail business. Receivables, net of
recoveries, of $33.2 million were written off against the allowance for credit
losses during 1995 compared with $13.2 million during 1994. The increased
write-offs were primarily attributable to one customer in the fishing
industry. Receivables past due over 30 days decreased slightly to 2.0% of
total receivables at December 31, 1995 compared with 2.2% at December 31,
1994. The allowance for credit losses is monitored to provide for an amount
which, in management's judgment, will be adequate to cover uncollectible
receivables. At December 31, 1995, the allowance for credit losses was $57.0
million which was 1.2% of finance receivables, net of unearned income(1.3%
excluding wholesale receivables), compared with $49.5 million and 1.2% (1.4%
excluding wholesale receivables) at December 31, 1994, respectively.
Other expense decreased $15.5 million compared with 1994 which was
unusually high due to the mark-to-market loss on written interest rate caps
and swaptions recorded in that year. See 1994 compared with 1993 section
below.
The effective income tax rate for 1995 was 37% compared with 38% for
1994. For information on this change, see Note 8 of the Notes to the
Consolidated Financial Statements.
Net income in 1995 was $65.2 million, compared with $32.2 million in
1994. The increase in net income resulted primarily from the increase in
financing volume, recording gains in 1995 versus losses in 1994 on interest
rate caps written by the Company (terminated in the second quarter of 1995),
and an increase in servicing and other securitization-related income and an
increase in gains on sales of receivables. The increase in income was
partially offset by a higher provision for credit losses.
1994 Compared With 1993
Total revenues for 1994 were $447.0 million, a 23% increase over 1993
revenues of $364.6 million. The increase in revenues was primarily the result
of earnings from the larger portfolio which increased to $4,437.6 million at
December 31, 1994 from $3,522.1 million at December 31, 1993.
The annualized interest rate on finance receivables (computed by dividing
finance income by the average monthly finance receivable balances) was 8.6%
for 1994 compared with 9.1% for 1993. Tax benefits associated with
governmental lease-purchase contracts and a portion of tax benefits associated
with long-term tax-oriented leases are not reflected in such annualized
interest rates.
Other income of $22.3 million for 1994 included fees, gains on sales of
equipment returned from lease, income from and gain on sale of receivables,
and other miscellaneous income. The increase of $5.6 million for 1994 was
primarily due to servicing fees and other income related to receivables sold
in the second quarter of 1994 and the gain on sale of these receivables, and a
higher amount of fees related to guarantees of securities of certain
Caterpillar dealers.
Interest expense for 1994 was $212.1 million, $39.0 million higher than
1993 due to increased borrowings to support the larger portfolio. This
increase was partially offset by lower borrowing rates as the average cost of
borrowed funds was 6.2% in 1994 compared with 6.5% in 1993.
Depreciation expense increased from $69.6 million in 1993 to $94.4
million in 1994 due to the increase in equipment on operating leases which,
computed as a monthly average balance, increased 23%.
General, operating, and administrative expenses increased $5.5 million
over 1993 primarily due to staff-related and other expenses required for
further expansion into Europe and to service the larger portfolio. The
Company's full-time employment increased from 361 at the end of 1993 to 414 at
December 31, 1994.
Provision for credit losses during 1994 increased from $20.8 million in
1993 to $23.2 million in 1994. This increase reflected increased levels of
new retail business for 1994. Receivables, net of recoveries, of $13.2
million were written off against the allowance for credit losses during 1994
compared with $18.8 million during 1993. Receivables past due over 30 days
increased slightly to 2.2% of total receivables at December 31, 1994 compared
with 1.9% at December 31, 1993. The allowance for credit losses is monitored
to provide for an amount which, in management's judgment, will be adequate to
cover uncollectible receivables. At December 31, 1994, the allowance for
credit losses was $49.5 million which was 1.2% of finance receivables, net of
unearned income(1.4% excluding wholesale receivables), compared with $41.5
million and 1.3% (1.4% excluding wholesale receivables) at December 31, 1993,
respectively.
Other expense of $19.3 million for 1994 primarily resulted from recording
$18.0 million of mark-to-market losses on interest rate caps and swaptions
written by the Company.
The effective income tax rate for 1994 was 38% compared with 36% for
1993. For information on this change, see Note 8 of the Notes to the
Consolidated Financial Statements.
Net income in 1994 was $32.2 million, compared with $37.8 million in
1993. The decrease in net income resulted primarily from an $11.5 million
mark-to-market after-tax unrealized charge for interest rate caps and
swaptions written by the Company. This decrease was partially offset by
increased earnings from a larger portfolio.
Capital Resources and Liquidity
The Company's operations during the year were primarily funded with a
combination of commercial paper, bank borrowings, proceeds from sale of
receivables, medium-term notes, intercompany borrowings, retained earnings,
and additional equity capital of $30.0 million invested by Caterpillar.
On March 30, 1995, the Company entered into its first private-placement,
revolving, asset-backed securitization whereby it agreed to sell on an ongoing
basis up to $300.0 million of wholesale (rental fleet financing) receivables.
The $300.0 million of proceeds from the sale were used to reduce existing
debt. The Company recognized a $2.4 million gain on this transaction and will
receive fees on a monthly basis for servicing the participating interests
sold.
The Company filed a shelf registration during the third quarter of 1995
obtaining approval in the amount of $760.0 million for securitization of
installment sale contracts and finance leases. In September 1995, $459.1
million of the Company's installment sale contracts were securitized/sold.
The proceeds from sale were used to reduce existing debt. The Company
recognized a $4.1 million pre-tax gain on this sale and receives fees for
servicing these sold receivables.
The net amount of sold receivables serviced by the Company was $754.8
million at December 31, 1995 which consisted of $300.0 million of wholesale
receivables, under a revolving asset-backed securitization agreement, and
$454.8 million of installment sale contracts.
Total debt outstanding as of December 31, 1995, was $4,180.2 million, an
increase of $313.8 million over that at December 31, 1994 and was primarily
comprised of $2,623.9 million of medium-term notes, $712.1 million of notes
payable to banks, and $710.3 million of commercial paper. Additional short-
term funding was available from Caterpillar (see Note 10 of the Notes to the
Consolidated Financial Statements). The intercompany borrowings outstanding
at December 31, 1995 were $475.5 million. Interest rate swaps were contracted
in the United States, Australia, Canada, Germany, and the United Kingdom to
hedge against interest rate fluctuations. See Note 6 of the Notes to the
Consolidated Financial Statements for more information on short-term and long-
term debt.
At December 31, 1995, the Company had available a total of $1,329.9
million of short-term credit lines which expire at various dates in 1996, and
a $36.7 million long-term credit line which expires May 1997. These credit
lines are with a number of banks and are considered support for the Company's
outstanding commercial paper, commercial paper guarantees, the discounting of
bank and trade bills, and bank borrowings. At December 31, 1995, there were
$712.1 million of these lines utilized for bank borrowings in Australia and
Europe.
The Company also participates with Caterpillar in two syndicated revolving
credit facilities aggregating $2.3 billion, consisting of a $1.4 billion five-
year facility and a $.9 billion 364-day revolving facility. The Company's
allocation is $1,440.0 million, consisting of a $876.5 million five-year
revolving credit and a $563.5 million 364-day revolving credit. The Company
has the ability to request a change in its allocation to maintain the required
amount of support for the Company's outstanding commercial paper and
commercial paper guarantees. These facilities provide for borrowings at
interest rates which vary according to LIBOR or money market rates. At
December 31, 1995, there were no borrowings under these facilities.
A U.S.$500.0 million five year revolving credit facility was established
in the United Kingdom to support the U.S.$500.0 million Euro-commercial paper
program which became operational in January 1996. The commercial paper will
be issued by Caterpillar International Finance PLC, an Irish subsidiary of the
Company, with the guarantee of the Company. Proceeds from the issuance of
commercial paper will be used to replace bank borrowings of the Company's
other international subsidiaries. At December 31, 1995, there were no
borrowings under this facility.
The revolving credit facilities require the Company to maintain its
consolidated ratio of profit before taxes plus fixed charges to fixed charges
at no less than 1.15 to 1 for each quarter; the Company's total debt to total
stockholder's equity, as defined by agreement, may not exceed 8.0 to 1 (8.25
to 1 moving six month average at other than year end effective January 1,
1996); and the Company's tangible net worth must be at least $20.0 million.
At December 31, 1995, the Company was in compliance with these requirements.
The Company's funding requirements were met primarily through the sale of
commercial paper and medium-term notes, discounting of bank and trade bills,
and through bank borrowings. During 1995, the average outstanding commercial
paper balance, net of discount, was $1,238.4 million at an average interest
rate of 6.0%. At year-end 1995, the face value of commercial paper
outstanding was $713.7 million. During 1995, $755.4 million of fixed-rate
medium-term notes were sold at an average interest rate of 5.3%, and $352.3
million of floating rate medium-term notes were sold at rates primarily
indexed to LIBOR. Medium-term notes outstanding at year-end 1995 were
$2,623.9 million. During the year, the average outstanding bank borrowings
were $703.0 million at an average interest rate of 5.2%.
In connection with its match funding objectives, the Company utilizes a
variety of interest rate contracts including swap and forward rate agreements.
All of these interest rate agreements are held or issued for purposes other
than trading. The agreements are entered into with major financial
institutions and are utilized for two principal reasons: 1) To modify the
Company's debt structure in order to match fund its receivable portfolio which
reduces the risk of deteriorating margins between its interest-earning assets
and interest-bearing liabilities, and 2) To gain an economic/competitive
advantage through lowering the cost of borrowed funds by either changing the
characteristics of existing debt instruments or entering into agreements in
combination with the issuance of debt. Notional amounts of interest rate swap
agreements totaled $1,619.3 million, future dated swap agreements totaled
$58.9 million, and forward rate agreements totaled $13.6 million at year-end
1995.
The Company hedges all of its foreign exchange exposure except for net
investments in its foreign subsidiaries. Exchange gains/losses on these net
investments are reflected in "Foreign currency translation adjustment" (see
Note 1H of the Notes to the Consolidated Financial Statements). The Company
has forward exchange contracts to hedge its U.S. dollar denominated
obligations in Australia against currency fluctuations. These contracts have
terms generally ranging up to three months. At December 31, 1995, the Company
had forward exchange contracts totaling $96.6 million, all with Caterpillar.
Equity capital at the end of 1995 was $603.3 million, an increase of
$100.2 million during the year. This increase included $65.2 million of
retained earnings from operations and $30.0 million of additional equity
investment made by Caterpillar. The increase in debt and funds provided by
operations and by Caterpillar were used to finance the increase in the
portfolio. The ratio of debt to equity at December 31, 1995 and 1994 was 7.7
to 1, compared with 7.3 to 1 for 1993. Included in the 1995 debt to total
stockholder's equity calculation is a $475.5 million short-term borrowing from
Caterpillar, which is included in Payable to Caterpillar Inc.
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 is included as a part of this report
on pages 15 through 30.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III.
Item 10. Directors and Executive Officers of the Registrant
Information for Item 10 is not required. See General Instruction J.
Item 11. Executive Compensation
Information for Item 11 is not required. See General Instruction J.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information for Item 12 is not required. See General Instruction J.
Item 13. Certain Relationships and Related Transactions
Information for Item 13 is not required. See General Instruction J.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
Report of Independent Accountants
Consolidated Statement of Financial Position at December 31,
1995, 1994, and 1993
Consolidated Statement of Income and Retained Earnings for
the Years Ended December 31, 1995, 1994, and 1993
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1995, 1994, and 1993
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K
None
(c) Exhibits
3.1 Certificate of Incorporation of the Company (incorporated by
reference from Exhibit 3.1 to the Company's Form 10, as
amended, Commission File No. 0-13295).
3.2 Bylaws of the Company (incorporated by reference from
Exhibit 3.2 to the Company's Annual Report on Form 10-K, for
the year ended December 31, 1990, Commission File No.
0-13295).
4.1 Indenture, dated as of April 15, 1985, between the Company
and Morgan Guaranty Trust Company of New York, as Trustee,
including form of Debt Security (see Table of Contents to
Indenture)(incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-3, Commission
File No. 33-2246).
4.2 First Supplemental Indenture, dated as of May 22, 1986,
amending the Indenture dated as of April 15, 1985 between
the Company and Morgan Guaranty Trust Company of New York,
as Trustee (incorporated by reference from Exhibit 4.1 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 20, 1986, Commission File No. 0-13295).
4.3 Second Supplemental Indenture, dated as of March 15, 1987,
amending the Indenture dated as of April 15, 1985 between
the Company and Morgan Guaranty Trust Company of New York,
as Trustee (incorporated by reference from Exhibit 4.3 to
the Company's Current Report on Form 8-K dated April 24,
1987, Commission File No. 0-13295).
4.4 Third Supplemental Indenture, dated as of October 2, 1989,
amending the Indenture dated as of April 15, 1985, between
the Company and Morgan Guaranty Trust Company of New York,
as Trustee (incorporated by reference from Exhibit 4.3 to
the Company's Current Report on Form 8-K, dated
October 16, 1989, Commission File No. 0-13295).
4.5 Fourth Supplemental Indenture, dated as of October 1, 1990,
amending the Indenture dated April 15, 1985, between the
Company and Morgan Guaranty Trust Company of New York, as
Trustee (incorporated by reference from Exhibit 4.3 to the
Company's Current Report on Form 8-K, dated
October 29, 1990, Commission File No. 0-13295).
4.6 Indenture, dated as of July 15, 1991, between the Company
and Continental Bank, National Association, as Trustee
(incorporated by reference from Exhibit 4.1 to the Company's
Current Report on Form 8-K, dated July 25, 1991, Commission
File No. 0-13295).
4.7 Tri Party Agreement dated as of August 23, 1994 among the
Company, BankAmerica National Trust Company and Morgan
Guaranty Trust Company of New York (incorporated by
reference from Exhibit 4.7 to the Company's Annual Report on
Form 10-K, for the year ended December 31, 1994, Commission
File No. 0-13295).
4.8 Support Agreement, dated as of December 21, 1984, between
the Company and Caterpillar (incorporated by reference from
Exhibit 4.2 to the Company's Form 10, as amended, Commission
File No. 0-13295).
4.9 First Amendment to the Support Agreement dated June 14, 1995
between the Company and Caterpillar (incorporated by
reference from Exhibit 4 to the Company's Current Report on
Form 8-K dated June 14, 1995, Commission File No 0-13295).
10.1 Tax Sharing Agreement, dated as of June 21, 1984, between
the Company and Caterpillar (incorporated by reference from
Exhibit 10.3 to the Company's Form 10, as amended,
Commission File No. 0-13295).
12 Statement Setting Forth Computation of Ratio of Profit to
Fixed Charges.
(The ratios of profit to fixed charges for the years ending
December 31, 1995, 1994, and 1993 were 1.34, 1.23, and 1.33,
respectively.)
23 Consent of Price Waterhouse LLP
Signa tures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Caterpillar Financial Services Corporation
(Registrant)
Dated: March 21, 1996 By: /s/ Nancy L. Snowden
Nancy L. Snowden, Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Date Signature Title
March 21, 1996 /s/ James S. Beard President, Director and
(James S. Beard) Principal Executive
Officer
March 21, 1996 /S/ James R. English Executive Vice President
(James R. English) and Director
March 21, 1996 /s/ James W. Owens Director
(James W. Owens)
March 21, 1996 /s/ Kenneth C. Springer Controller and Principal
(Kenneth C. Springer) Accounting Officer
March 21, 1996 /s/ Frank C. Carder Treasurer and Principal
(Frank C. Carder) Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Caterpillar Financial Services Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 11 present fairly, in all material
respects, the financial position of Caterpillar Financial Services Corporation
and its subsidiaries at December 31, 1995, 1994, and 1993, and the results of
their operations and their cash flows for each of the three years then ended,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
January 18, 1996
CATERPILLAR FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Millions of dollars)
December 31,
1995 1994 1993
Assets:
Cash and cash equivalents $ 43.6 $ 16.3 $ 15.6
Finance receivables (Notes 2,3, and 5):
Wholesale notes receivable 538.3 516.0 142.8
Retail notes receivable 1,382.1 1,105.9 1,035.5
Investment in finance receivables 3,471.7 2,831.4 2,350.8
5,392.1 4,453.3 3,529.1
Less: Unearned income 515.6 415.5 348.2
Allowance for credit losses 57.0 49.5 41.5
4,819.5 3,988.3 3,139.4
Equipment on operating leases,
less accumulated depreciation (Note 4) 437.3 425.0 364.6
Other assets 121.7 81.6 45.1
Total assets $5,422.1 $4,511.2 $3,564.7
Liabilities and stockholder's equity:
Payable to dealers and others $ 51.0 $ 42.9 $ 13.7
Payable to Caterpillar Inc. (Note 10) 480.6 3.2 3.9
Accrued interest payable 39.2 37.8 33.6
Income tax payable (Note 8) 18.5 21.6 36.0
Other liabilities 4.5 25.5 5.4
Short-term borrowings (Note 6) 1,453.1 1,383.1 1,138.2
Current maturities of long-term debt
(Note 6) 1,105.8 807.6 492.5
Long-term debt (Note 6) 1,621.3 1,675.7 1,410.4
Deferred income taxes (Note 8) 44.8 10.7 13.0
Total liabilities 4,818.8 4,008.1 3,146.7
Commitments and contingent liabilities
(Note 7)
Common stock - $1 par value
Authorized: 2,000 shares
Issued and outstanding: one share 325.0 295.0 250.0
Profit employed in the business 272.9 207.7 175.5
Foreign currency translation
adjustment 5.4 .4 (7.5)
Total stockholder's equity 603.3 503.1 418.0
Total liabilities and stockholder's equity $5,422.1 $4,511.2 $3,564.7
(See Notes to Consolidated Financial Statements)
CATERPILLAR FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31,
(Millions of dollars)
1995 1994 1993
Revenues:
Wholesale finance income $ 64.2 $ 25.3 $ 5.8
Retail finance income 361.1 275.2 246.4
Rental income 133.6 124.2 95.7
Other income 52.9 22.3 16.7
Total revenues 611.8 447.0 364.6
Expenses:
Interest (Note 6) 298.4 212.1 173.1
Depreciation 101.2 94.4 69.6
General, operating, and administrative 61.9 47.2 41.7
Provision for credit losses 42.8 23.2 20.8
Other expense 3.8 19.3 1.0
Total expenses 508.1 396.2 306.2
Income before income taxes and minority
interest 103.7 50.8 58.4
Provision for income taxes (Note 8) 38.5 19.3 21.3
Minority interest in losses of
subsidiary - .7 .7
Net income 65.2 32.2 37.8
Retained earnings - beginning of year 207.7 175.5 137.7
Retained earnings - end of year $272.9 $207.7 $175.5
(See Notes to Consolidated Financial Statements)
CATERPILLAR FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(Millions of dollars)
1995 1994 1993
Cash flows from operating activities:
Net income $ 65.2 $ 32.2 $ 37.8
Adjustments for noncash items:
Depreciation 101.2 94.4 69.6
Provision for credit losses 42.8 23.2 20.8
Mark-to-market adjustment (10.9) 18.0 -
Other (1.3) (6.1) (4.4)
Change in assets and liabilities:
Receivables from customers and others (30.5) (25.3) (15.3)
Deferred income taxes 34.2 (3.2) -
Payable to dealers and others 3.2 27.1 2.8
Payable to Caterpillar Inc. 1.9 (.7) 1.0
Accrued interest payable 1.1 3.6 5.5
Income tax payable (3.1) (14.3) 6.0
Other, net (10.7) 1.4 2.1
Net cash provided by operating
activities 193.1 150.3 125.9
Cash flows from investing activities:
Additions to equipment (209.9) (186.4) (204.1)
Disposals of equipment 84.1 73.0 32.6
Additions to finance receivables (4,868.6) (2,934.2) (2,023.0)
Collections of finance receivables 2,786.8 1,850.2 1,388.8
Proceeds from sales of receivables, net 1,261.5 241.4 -
Other, net 2.4 (1.4) .2
Net cash used for investing
activities (943.7) (957.4) (805.5)
Cash flows from financing activities:
Additional paid-in capital 30.0 45.0 30.0
Payable to Caterpillar Inc. 475.5 - -
Proceeds from long-term debt issues 1,145.0 1,082.0 918.4
Payments on long-term debt (905.9) (505.2) (517.4)
Short-term borrowings, net 33.2 186.2 253.5
Net cash provided by financing
activities 777.8 808.0 684.5
Effect of exchange rate changes on cash .1 (.2) ( .8)
Net change in cash and cash equivalents 27.3 .7 4.1
Cash and cash equivalents at beginning
of year 16.3 15.6 11.5
Cash and cash equivalents at end of year $ 43.6 $ 16.3 $ 15.6
(See Notes to Consolidated Financial Statements)
CATERPILLAR FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Operations and basis of consolidation
Caterpillar Financial Services Corporation (the "Company") is a wholly
owned finance subsidiary of Caterpillar Inc. ("Caterpillar"). The Company
provides financing of earthmoving, construction, and materials handling
machinery and engines sold by Caterpillar dealers, and turbine engines sold by
Solar Turbines Incorporated through offices located in North America,
Australia, and Europe. The Company also provides customer and dealer loans
for various business purposes.
The accompanying financial statements include the accounts of
Caterpillar Financial Services Corporation and its subsidiaries.
B. Recognition of earned income
Retail finance income - Income on retail finance receivables (financing
leases, installment sale contracts, and customer and dealer loans) is
recognized over the term of the contract at a constant rate of return on the
scheduled uncollected principal balance.
Wholesale finance income - Income on wholesale finance receivables
(dealer floor planning and rental fleet financing) is recognized based on the
daily balance of wholesale receivables outstanding and the applicable
effective interest rate.
Rental income - Income on operating leases is reported over the life of
the operating lease in the period earned.
Fee income - Loan origination and commitment fees in excess of five
hundred dollars are amortized to finance income using the interest method over
the contractual lives of the finance receivables.
Recognition of income on loans and leases (Finance receivables, which
includes notes,and operating leases) is suspended when management determines
that collection of future income is not probable. Accrual is resumed if the
receivable becomes contractually current and collection doubts are removed;
previously suspended income is recognized at that time.
C. Depreciation
Depreciation on operating leases is recognized using the straight-line
method over the lease term. The depreciable basis is the original cost of the
equipment less the estimated residual value of the equipment at the end of the
lease term. Depreciation on property and equipment, other than equipment on
operating leases, that the Company owns, was less than $1.8 million for 1995.
D. Derivative financial instruments
Note 6 contains information about the accounting for interest rate and
foreign currency derivative contracts.
E. Cash and cash equivalents
Cash and cash equivalents include cash on hand or on deposit with banks
and highly liquid short-term investments with maturities of three months or
less at the time of purchase.
F. Allowance for credit losses
Management regularly evaluates factors affecting the collectibility of
receivable balances and maintains an allowance for credit losses, which it
believes is sufficient to cover uncollectible accounts. Uncollectible
receivable balances are written off against the allowance for credit losses
when the underlying collateral is repossessed or when management has
determined that it is probable the receivable balance is uncollectible.
G. Income taxes
The Company has a tax sharing agreement with Caterpillar in which
Caterpillar collects from or pays to the Company its allocated share of any
consolidated U.S. income tax liability or credit applicable to any period for
which the Company is included as a member of the consolidated group. A
similar agreement exists between Caterpillar Financial Australia Limited and
Caterpillar of Australia Ltd. with respect to taxes payable in Australia.
H. Foreign currency translation
Assets and liabilities of foreign subsidiaries (all use the local
currency as their functional currency) are translated at current exchange
rates, and the effects of translation adjustments are reported as a separate
component of stockholder's equity entitled "Foreign currency translation
adjustment."
I. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2 - RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
The contractual maturities of outstanding receivables (rental fleet
financings of $330.7 million are shown as maturing in 1996 due to the
Company's experience that most terminate in six months) at December 31, 1995
were:
Installment Financing
Amounts due in contracts leases Notes Total
1996 $ 505.2 $ 656.8 $ 976.3 $2,138.3
1997 355.5 511.1 250.4 1,117.0
1998 218.2 335.6 257.2 811.0
1999 95.2 172.1 176.8 444.1
2000 26.9 71.1 116.8 214.8
Thereafter 3.1 110.8 142.9 256.8
1,204.1 1,857.5 1,920.4 4,982.0
Residual Value - 410.1 - 410.1
Total $1,204.1 $2,267.6 $1,920.4 $5,392.1
Receivables generally may be repaid or refinanced without penalty prior
to contractual maturity. The Company, from time to time, also sells
receivables. Accordingly, this presentation should not be regarded as a
forecast of future cash collections.
The average recorded investment in impaired loans and leases (those for
which management does not expect to collect all amounts due according to the
contractual terms of the agreement) during 1995 was $50.5 million compared
with $48.9 million during 1994. The total recorded investment in impaired
loans and leases at December 31, 1995 of $36.8 million ($47.3 million at
December 31, 1994) less the fair value of the underlying collateral of $25.2
million ($32.0 million at December 31, 1994) represents an $11.6 million
($15.3 million for 1994) projected loss on currently impaired loans and leases
for which there is a related allowance for credit losses. At December 31,
1995, the recognition of finance income had been suspended on $44.1 million of
finance receivables compared with $46.7 million at December 31, 1994 and $20.1
million at December 31, 1993.
Activity relating to the allowance for credit losses, including the
portion related to impaired loans and leases, is shown below:
1995 1994 1993
Balance at beginning of year $49.5 $41.5 $36.5
Provision for credit losses 42.8 23.2 20.8
Acquisition of Spanish subsidiary - - 3.5
Receivables written off, net of recoveries (33.2) (13.2) (18.8)
Adjustment related to sale of receivables (2.7) (3.0) -
Foreign currency translation adjustment .6 1.0 (.5)
Balance at end of year $57.0 $49.5 $41.5
NOTE 3 - INVESTMENT IN FINANCING LEASES
The components of the Company's net investment in financing leases at
December 31 were as follows:
1995 1994 1993
Total minimum lease payments receivable $1,857.5 $1,387.2 $1,135.4
Estimated residual value of leased assets:
Guaranteed 113.3 83.5 71.4
Unguaranteed 296.8 208.2 148.5
2,267.6 1,678.9 1,355.3
Less: Unearned income 362.7 264.0 229.5
Net investment in financing leases $1,904.9 $1,414.9 $1,125.8
NOTE 4 - EQUIPMENT ON OPERATING LEASES
Components of the Company's investment in equipment on operating leases,
less accumulated depreciation, at December 31 were as follows:
1995 1994 1993
Equipment on operating leases, at cost $650.6 $607.2 $503.5
Less:
Accumulated depreciation 213.3 182.2 138.9
Equipment on operating leases, net $437.3 $425.0 $364.6
At December 31, 1995, scheduled minimum rental payments for operating
leases were as follows:
1996 $128.2
1997 91.5
1998 64.0
1999 35.5
2000 18.4
Thereafter 5.4
Total $343.0
NOTE 5 - CONCENTRATION OF CREDIT RISK
The Company's receivables are primarily comprised of receivables under
installment sale contracts, receivables arising from leasing transactions, and
notes receivable. The Company generally maintains a secured interest in
equipment financed, and a substantial portion of its business activity is with
customers located within the United States. Receivables from customers in
construction-related industries made up approximately one-third of total
finance receivables as of December 31, 1995, 1994, and 1993, respectively.
However, no single customer or region represents a significant concentration
of credit risk.
NOTE 6 - BORROWINGS
Short-Term Borrowings
Total average short-term borrowings during 1995, 1994, and 1993 were
$1,963.4 million, $1,317.6 million, and $1,038.3 million, respectively.
Commercial paper and bank borrowings outstanding at December 31, 1995
generally had maturities not exceeding 90 days with average discount rates of
6.0% and 5.3%, respectively. The approximate weighted average interest rate
on short-term borrowings was 5.8%, 5.0%, and 4.8% for 1995, 1994, and 1993,
respectively. Interest paid on short-term borrowings was $121.2 million in
1995, $89.6 million in 1994, and $58.3 million in 1993.
Short-term borrowings at December 31 consisted of the following:
1995 1994 1993
Notes payable to banks, net $ 712.1 $ 532.0 $ 336.0
Commercial paper, net 710.3 841.2 796.9
Other 30.7 9.9 5.3
Total $1,453.1 $1,383.1 $1,138.2
At December 31, 1995, the Company had available a total of $1,329.9
million of short-term credit lines which expire at various dates in 1996 and a
$36.7 million long-term credit line which expires May 1997. These credit
lines are with a number of banks and are considered support for the Company's
outstanding commercial paper, commercial paper guarantees, the discounting of
bank and trade bills, and bank borrowings. At December 31, 1995, there were
$712.1 million of these lines utilized for bank borrowings in Australia and
Europe.
The Company also participates with Caterpillar in two syndicated
revolving credit facilities aggregating $2.3 billion, consisting of a $1.4
billion five-year facility and a $.9 billion 364-day revolving facility. The
Company's allocation is $1,440.0 million, consisting of an $876.5 million
five-year revolving credit and a $563.5 million 364-day revolving credit. The
Company has the ability to request a change in its allocation to maintain the
required amount of support for the Company's outstanding commercial paper and
commercial paper guarantees. These facilities provide for borrowings at
interest rates which vary according to LIBOR or money market rates. At
December 31, 1995, there were no borrowings under these facilities.
A U.S.$500.0 million five year revolving credit facility was established
in the United Kingdom to support the U.S.$500.0 million Euro-commercial paper
program which became operational in January 1996. The commercial paper will
be issued by Caterpillar International Finance PLC, an Irish subsidiary of the
Company, with the guarantee of the Company. Proceeds from the issuance of
commercial paper will be used to replace bank borrowings of the Company's
other international subsidiaries. At December 31, 1995, there were no
borrowings under this facility.
The revolving credit facilities require the Company to maintain its
consolidated ratio of profit before taxes plus fixed charges to fixed charges
at no less than 1.15 to 1 for each quarter; the Company's total debt to total
stockholder's equity, as defined by agreement, may not exceed 8.0 to 1 (8.25
to 1 moving six month average at other than year end effective January 1,
1996); and the Company's tangible net worth must be at least $20.0 million.
At December 31, 1995, the Company was in compliance with these requirements.
Long-Term Borrowings
During 1995, the Company publicly issued $1,107.7 million of medium-term
notes, of which $755.4 million were at fixed interest rates and $352.3 million
were at floating interest rates primarily indexed to LIBOR. Interest rates on
fixed-rate medium-term notes are established by the Company as of the date of
issuance. The notes are offered on a continuous basis through agents and have
maturities ranging from nine months to 15 years. The weighted average
interest rate on all outstanding medium-term notes was 6.2% at December 31,
1995. Interest paid on long-term debt in 1995, 1994, and 1993 was $174.9
million, $123.6 million, and $102.1 million, respectively.
Long-term debt outstanding at December 31, 1995, matures as follows:
1996 $1,105.8
1997 711.4
1998 486.3
1999 238.4
2000 81.7
Thereafter 103.5
Total $2,727.1
Derivative Financial Instruments
In connection with its match funding objectives, the Company utilizes a
variety of interest rate contracts including swap and forward rate agreements.
All of these interest rate agreements are held or issued for purposes other
than trading. The agreements are entered into with major financial
institutions and are utilized for two principal reasons: 1) To modify the
Company's debt structure in order to match fund its receivable portfolio which
reduces the risk of deteriorating margins between its interest-earning assets
and interest-bearing liabilities, and 2) To gain an economic/competitive
advantage through lowering the cost of borrowed funds by either changing the
characteristics of existing debt instruments or entering into agreements in
combination with the issuance of debt.
Net interest on the Company's interest rate swap agreements is accrued
to either Other assets or Accrued interest payable and recognized as an
adjustment to Interest expense. Payments on forward rate agreements are
deferred as Other assets and amortized to Interest expense over the term of
the agreement. Gains and losses on termination of these agreements are
deferred and amortized over the remaining original life of the agreement,
unless the underlying debt to which the agreement is designated is disposed of
or the hedge is terminated because of a loss of correlation, in which case the
gain or loss is recognized immediately into income.
The Company had marked to market its sold (written) interest rate cap
agreements (with notional amounts totaling $235.7 million as of December 31,
1994) that were terminated in the second quarter of 1995. Gains/losses on
these agreements were recorded as adjustments to Other liabilities and Other
income/Other expense.
As of December 31, 1995, the Company had outstanding interest rate swap
contracts with notional amounts totaling $1,619.3 million, all of which are
either designated as hedges of specific debt issuances or of commercial paper.
These swap agreements have terms generally ranging up to five years, which
effectively change $1,100.9 million of floating rate debt to fixed rate debt,
$311.0 million of fixed rate debt to floating rate debt, and $207.4 million of
floating rate debt to floating rate debt having different characteristics.
The interest rate swaps designated to commercial paper provide the ability to
obtain fixed rate term debt utilizing short-term debt markets. The Company
also had swaps having future effective dates with a total notional amount of
$58.9 million, which will effectively change $55.9 million of floating rate
debt to fixed rate debt and $3.0 million of fixed rate debt to floating rate
debt. The effective dates of the future dated swaps range from 1996 through
1998, and the terms of these swaps generally range up to four years.
The table below summarizes by notional amounts the activity for each
major category of interest rate swap agreements (excluding future swaps):
Floating Fixed to Floating
to Fixed Floating to Floating Total
Balance at beginning of year$ 951.3 $ 304.0 $ 492.2 $1,747.5
Additions 419.9 70.0 60.0 549.9
Maturities/amortizations (282.6) (63.0) (245.2) (590.8)
Terminations (2.7) - (99.6) (102.3)
Foreign currency translation
adjustment 15.0 - - 15.0
Balance at end of year $1,100.9 $ 311.0 $ 207.4 $1,619.3
The table below summarizes expected maturities and weighted average
interest rates to be received and paid on the interest rate swap portfolio
(excluding future swaps) at December 31, 1995. A key assumption in the
preparation of the table is that rates remain constant at December 31, 1995
levels. Floating rates paid by the Company are primarily LIBOR based.
1996 1997 1998 1999 2000 Thereafter TOTAL
FLOATING TO FIXED SWAPS:
Notional Amount $435.7 $284.3 $211.1 $ 16.0 $ 33.0 $120.8 $1,100.9
Weighted Average:
Receive Rate 5.8% 6.0% 5.9% 6.5% 5.9% 5.8% 5.9%
Pay Rate 5.9% 6.4% 6.3% 7.3% 6.4% 6.7% 6.2%
FIXED TO FLOATING SWAPS:
Notional Amount $176.0 $115.0 $ 20.0 $ - $ - $ - $ 311.0
Weighted Average:
Receive Rate 4.6% 7.4% 5.2% -% -% -% 5.7%
Pay Rate 5.8% 5.6% 5.9% -% -% -% 5.7%
FLOATING TO FLOATING SWAPS:
Notional Amount $ 97.0 $ .4 $ 50.0 $ 60.0 $ - $ - $ 207.4
Weighted Average:
Receive Rate 5.0% .1%* 6.4% 5.0% -% -% 5.3%
Pay Rate 5.9% 5.7% 6.0% 5.7% -% -% 5.9%
*Low Rate offset by a low pay rate on a related structured medium-term note.
The Company's current accounting loss exposure on interest rate swaps
related to credit risks is limited to the accrued receivable of $1.7 million
at December 31, 1995. In addition, the Company may incur additional costs in
replacing at current market rates any contracts for which a counterparty fails
to perform. The market value of interest rate swap agreements in a favorable
position to the Company was $6.5 million at December 31, 1995. To minimize
the risk of credit losses being incurred, the Company deals only with
counterparties that have A- or better credit ratings and monitors the credit
standing of the counterparties. The Company does not anticipate
nonperformance by any of these counterparties.
The Company has forward exchange contracts to hedge its U.S. dollar
denominated obligations in Australia against currency fluctuations. These
contracts have terms generally ranging up to three months and do not subject
the Company to risk due to exchange rate movements, because the gains and
losses on the contracts offset the losses and gains on the liabilities being
hedged. At December 31, 1995, the Company had forward exchange contracts
totaling $96.6 million, all with Caterpillar.
The Company's outstanding forward rate agreements, which are utilized to
hedge short-term borrowings, totaled $13.6 million at year end. These
agreements have terms generally ranging up to six months.
NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES
At December 31, 1995, the Company was contingently liable under
guarantees of securities of certain Caterpillar dealers totaling $282.2
million of which $222.1 million was outstanding compared to $258.0 million and
$164.5 million, respectively, at December 31, 1994 and compared to $249.6
million and $173.5 million, respectively, at December 31, 1993. These
guarantees have terms ranging up to two years and are fully secured by dealer
assets. No loss has been experienced nor is any anticipated under these
guarantees.
The Company is a party to agreements in the normal course of business
with selected customers and dealers in which the Company commits to provide a
set dollar amount of financing on a preapproved basis. The Company also
provides lines of credit to selected customers and dealers, of which a portion
remains unutilized as of the reporting date. Commitments and lines of credit
generally have fixed expiration dates or other termination clauses. It has
been the Company's experience that not all commitments and lines of credit
will be utilized. Management uses its same credit policies in making
commitments and granting lines of credit as it does for any other financing.
The Company does not require collateral for these commitments/lines, but if
credit is extended, collateral may be required upon funding. The amount of
the commitments and lines of credit outstanding as of December 31, 1995 was
$2.4 billion.
NOTE 8 - INCOME TAXES
The components of the provision for income taxes were as follows for the
years ended December 31:
1995 1994 1993
Current tax provision (credit):
U.S. federal taxes $(5.7) $20.7 $17.4
Foreign taxes 6.1 2.1 2.9
U.S. state taxes 3.7 2.9 2.5
4.1 25.7 22.8
Deferred tax provision (credit):
U.S. federal taxes 31.9 (7.4) (1.2)
Foreign taxes 1.2 .8 (.6)
U.S. state taxes 1.3 .2 .3
34.4 (6.4) (1.5)
Total provision for income taxes $38.5 $19.3 $21.3
Current tax provision (credit) is the amount of income taxes reported or
expected to be reported on the Company's tax returns. Income taxes paid in
1995, 1994, and 1993 totaled $5.4 million, $35.6 million, and $14.8 million,
respectively.
In August 1993, the U.S. federal income tax rate for corporations was
increased from 34% to 35% effective January 1, 1993. As a result of the rate
increase, net U.S. deferred tax liabilities and the 1993 provision for income
taxes were increased $0.9 million.
Differences between accounting rules and tax laws cause differences
between the bases of certain assets and liabilities for financial reporting
and tax purposes. The tax effects of these differences, to the extent they
are temporary, are recorded as deferred tax assets and liabilities under SFAS
109 and consisted of the following components at December 31:
1995 1994 1993
U.S. federal, U.S. state, and foreign taxes:
Deferred tax assets:
Allowance for credit losses $ 18.1 $ 16.0 $ 11.8
Minimum tax credit carryforwards - 21.9 22.0
Other credit carryforwards .5 2.0 -
18.6 39.9 33.8
Deferred tax liabilities - primarily
capital assets (63.4) (50.6) (46.8)
Valuation allowance for deferred tax assets - - -
Deferred taxes - net $(44.8) $(10.7) $(13.0)
No valuation allowance for the Company's deferred tax assets was
necessary at December 31, 1995, 1994, and 1993. The Company's tax credit
carryforwards may be carried forward indefinitely.
The provision for income taxes was different than would result from
applying the U.S. statutory rate to income before income taxes and minority
interest for the reasons set forth in the following reconciliation:
1995 1994 1993
Taxes computed at U.S. statutory rates $36.3 $17.8 $20.4
Increases (decreases) in taxes
resulting from:
Finance income not subject to federal
taxation (2.7) (2.4) (2.5)
State income taxes - net of federal taxes 3.2 2.1 1.8
Subsidiaries' results subject to tax
rates other than U.S. statutory rates 2.5 2.1 .9
Change in U.S. federal tax rate - - .9
Other, net (.8) (.3) (.2)
Provision for income taxes $38.5 $19.3 $21.3
The domestic and foreign components of income before income taxes and
minority interest of consolidated companies were as follows:
1995 1994 1993
Domestic $ 89.8 $47.7 $54.4
Foreign 13.9 3.1 4.0
Total $103.7 $50.8 $58.4
The foreign component of income before taxes and minority interest is
comprised of the profit of all consolidated subsidiaries located outside the
United States.
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and cash equivalents; Other assets, excluding accrued receivable on
swaps; Liabilities, excluding mark-to-market liability on written caps
terminated in the second quarter of 1995, accrued interest payable on swaps,
long-term debt, and deferred income taxes; and Forward exchange contracts.
For these items, the carrying amount is a reasonable estimate of fair value.
Finance receivables - net. Fair value of the outstanding receivables
(excluding tax-oriented leases with a net carrying amount at December 31,
1995, 1994, and 1993 of $613.1 million, $391.1 million, and $333.2 million,
respectively and the effect of yen currency swaps*) is estimated by
discounting the future cash flows using the Company's current rates for new
receivables with similar remaining maturities, except for floating rate rental
fleet financings with expected remaining maturities of less than six months,
for which the carrying amount is considered a reasonable estimate of fair
value. The Company's rates in effect January 1, 1996 were used in the 1995
fair value calculation. Historical experience of bad debts is also factored
into the calculation.
Long-term debt. Fair value is estimated by discounting the future cash
flows using the Company's current borrowing rates for similar types and
maturities of debt, except for floating rate notes for which the carrying
amount is considered a reasonable estimate of fair value.
Interest rate swaps, written caps, and yen currency swaps. Fair value
is estimated based upon the amount that the Company would receive or pay to
terminate the agreements as of the reporting date. The carrying value for the
Company's written caps and yen currency swaps (both terminated in 1995) is the
fair value.
The estimated fair values of the Company's financial instruments are as
follows:
1995 1994 1993
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
Cash and cash
equivalents $ 43.6 $ 43.6 $ 16.3 $ 16.3 $ 15.6 $ 15.6
Finance receivables -
net (excluding tax-
oriented leases and
the effect of yen
currency swaps*) 4,206.4 4,174.8 3,603.0 3,581.9 2,806.2 2,821.5
Other assets (excluding
accrued receivable on
swaps and forward
exchange contracts) 120.0 120.0 78.9 78.9 42.3 42.3
Liabilities, excluding
mark-to-market liability
on written caps, accrued
interest payable on
swaps and forward
exchange contracts,
long-term debt, and
deferred income
taxes (2,042.6)(2,042.6)(1,486.9)(1,486.9)(1,222.0)(1,222.0)
Written caps - - (19.2) (19.2) - -
(terminated second quarter 1995)
Long-term debt (2,727.1)(2,789.7)(2,483.3)(2,448.2)(1,902.9)(1,941.6)
Off-balance-sheet financial
instruments**:
Interest rate swaps:
In a net receivable
position 1.7 6.5 2.7 46.1 2.8 7.9
In a net payable
position (3.6) (17.1) (4.6) (43.9) (7.3) (24.1)
Forward exchange
contracts (.7) (.7) (3.4) (3.4) (1.5) ( 1.5)
Yen currency swaps * * (5.8) (5.8) * *
*The 1993 amount is included in Finance receivables - net; terminated in 1995.
**The amounts shown under "Carrying amount" represent accruals or deferred
income (fees) arising from these off-balance-sheet financial instruments.
All derivative financial instruments are held or issued for purposes other
than trading. The 1993 amounts in the Interest rate swaps category include
caps and options.
Fair values for 1995 are impacted by falling interest rates and
increased spreads on finance receivables and do not recognize up-front income
receipts.
NOTE 10 - TRANSACTIONS WITH RELATED PARTIES
Caterpillar has made capital contributions to the Company of $325.0
million. The Company and Caterpillar also have an agreement (the "Support
Agreement") whereby the parent will cause the Company to have at all times a
net worth of at least $20.0 million and ensure that the Company maintains a
ratio of earnings and interest expense (as defined) to interest expense of not
less than 1.15 to 1.
To supplement external debt financing sources, the Company has variable
amount lending agreements with Caterpillar (including one of its
subsidiaries). Under these agreements, which may be amended from time to
time, the Company may borrow up to $537.3 million from Caterpillar, and
Caterpillar may borrow up to $237.3 million from the Company. All of the
variable amount lending agreements are effective for indefinite terms and may
be terminated by either party upon 30 days' notice. In 1995, the Company
incurred $2.5 million in interest expense related to borrowings from
Caterpillar. At December 31, 1995, the Company had outstanding borrowings
with Caterpillar totaling $475.5 million, but had no loans receivable under
these agreements. At December 31, 1994 and 1993, the Company had no
outstanding borrowings or loans receivable under these agreements.
The Company has forward exchange contracts to hedge its U.S. dollar
denominated obligations in Australia against currency fluctuations. These
contracts have terms generally ranging up to three months. At December 31,
1995, 1994, and 1993, the Company had contracts totaling $96.6 million, $172.6
million, and $143.1 million, respectively, all with Caterpillar.
The Company has agreements with a subsidiary of Caterpillar to purchase,
at a discount, some or all of this subsidiary's receivables generated by sales
of products to Caterpillar dealers in Germany, Austria, and the Czech
Republic. These purchases (dealer floor planning) in 1995, 1994, and 1993
totaled $330.7 million, $190.9 million, and $210.2 million, respectively. The
cash discount earned in 1995, 1994, and 1993 was $5.3 million, $3.0 million,
and $4.4 million, respectively. At December 31, 1995, 1994, and 1993,
wholesale notes receivable balances related to floor planning were $189.7
million, $160.1 million, and $124.1 million, respectively.
The Company, in conjunction with Caterpillar and its subsidiaries,
periodically offers below-market-rate financing to customers under
merchandising programs. Caterpillar, at the outset of the transaction, remits
to the Company an amount equal to the present value of the interest
differential which is recognized as income over the term of the contracts.
During 1995, the Company recorded receivables of $86.8 million from
Caterpillar and its subsidiaries relative to such programs, compared with
$37.2 million in 1994 and $7.9 million in 1993. The significant increases for
1995 and 1994 were due to interest subsidies related to the expansion of the
program supporting Caterpillar dealer rental fleets in North America.
Caterpillar provides the Company with certain operational and financial
support which is integral to the conduct of the Company's business. The
employees of the Company are covered by various benefit plans, including
pension/post-retirement plans, administered by Caterpillar. The amount of
such charges was $2.9 million, $2.2 million, and $2.1 million for the years
ended December 31, 1995, 1994, and 1993, respectively. The Company also
reimburses Caterpillar for certain corporate services which amounted to
$1.8 million, $1.7 million , and $2.1 million for the years ended December 31,
1995, 1994, and 1993, respectively.
NOTE 11 - LEASES
The Company leases certain offices and other property through operating
leases. Lease expense on these leases is charged to operations as incurred.
Total rental expense for operating leases was $5.1 million, $4.5 million, and
$3.7 million for 1995, 1994, and 1993, respectively. Minimum payments for
operating leases having initial or remaining noncancelable terms in excess of
one year are:
1996 $ 3.2
1997 3.0
1998 2.8
1999 2.5
2000 2.2
Thereafter 4.9
Total $18.6
NOTE 12 - SEGMENT INFORMATION
Although the majority of its business (including cross-border financing)
is done in the United States, the Company also conducts operations in Germany
and other countries. Total assets, revenues, and net income applicable to
operations by geographic segments were as follows:
1995 1994 1993
Assets:
United States $4,054.7 $3,518.7 $2,878.1
Germany 543.6 539.4 330.1
Other countries 1,006.7 571.7 449.8
5,605.0 4,629.8 3,658.0
Less: Investment in subsidiaries 182.5 118.1 93.1
Intercompany balances .4 .5 .2
Total assets $5,422.1 $4,511.2 $3,564.7
Revenues:
United States $ 468.8 $ 343.6 $ 293.6
Germany 37.9 30.9 26.2
Other countries 105.2 72.5 44.9
611.9 447.0 364.7
Less intercompany interest - - .1
Total revenues $ 611.9 $ 447.0 $ 364.6
Net income:
United States $ 58.6 $ 31.3 $ 35.4
Germany 3.2 2.9 1.7
Other countries 3.4 (2.0) .7
Total net income $ 65.2 $ 32.2 $ 37.8
NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Financial data for the interim periods were as follows:
QUARTERS
FIRST SECOND THIRD FOURTH
1995 1994 1995 1994 1995 1994 1995 1994
Total revenues $143.1 $102.2 $152.8 $108.9 $160.5 $113.2 $155.4 $121.7
Income before
income taxes and
minority interest 28.9 9.7 25.8 13.0 32.4 17.2 16.6 10.9
Net income 17.8 6.4 15.6 8.5 20.5 10.9 11.3 6.4